Issue 181 – THE DELAIRE REPORT

03 June, 2015

Last week, the global gold market was rather subdued as the upward momentum in prices ran out of steam hitting resistance at around $1220 an ounce.

Despite a mild rally on Friday, gold prices fell for the second week in a row. The price of the yellow metal edged up on Friday from the previous day’s 2-1/2-week low, supported by a slightly weaker dollar and uncertainty over Greece’s debt talks.

On-going concerns over a potential Greek debt default weighed on the global financial and gold markets last week as G7 leaders scrambled to try to come up with an 11th hour bailout package.

The heads of both the International Monetary Fund and the European Central Bank have attended talks in Berlin in an attempt to reach a deal with Greece.

They joined German Chancellor Angela Merkel, French President Francois Hollande and European Commission head Jean-Claude Juncker at the meeting.

The aim was to come up with “a final proposal” to present to Athens, according to reports.

A €300m (£215m) payment to the IMF is due on Friday.

There are fears Greece does not have the necessary funds to pay and could default on the debt, ultimately leading to its exit from the Eurozone.

Friday’s payment is the first of four totalling €1.5 billion that Greece is due to pay to the IMF in June, and it is understood that the payments could be all bundled together and repaid in a single transaction at the end of the month.

If Greece decides to repay the funds in this way, it would have to notify the IMF, but it has not yet done so.

While, the government of Greece negotiates with its creditors, customers are abandoning Greek banks in droves as doubts over the country’s economic future grow. In the last three days or so, a staggering €800 million (£570 million) has been pulled out of Greek banks, sparking fears of a major bank run.

Fearing a total financial collapse, savers have been pulling cash out of their bank accounts and the government has struggled to make benefit payments.

According to data from the European Central Bank, Greek bank deposits are now at their lowest level since 2004, falling to $198.89 billion from more than $242 billion just five months ago,

Although we have seen this crisis continue for months, it now seems that is has to come to a head this month.

Greece isn’t the only nation facing a solvency crisis. In a way, Greece is the least of the world’s debt problems. The Greek economy represents less than 0.4% of world GDP. If Greece goes under, the world economy won’t be effected in the least.

However, if Greece fails, there is a real possibility of contagion. Greece is the smallest of the so-called PIGS countries. The others – Portugal, Italy, and Spain – are larger dominos that could potentially fall. Down the line, the world’s third largest economy, Japan, has a debt to GDP ratio that is as large as Greece’s. The United States isn’t far behind. Total U.S. government debt recently came in at 100% of GDP – which makes it more leveraged than most Third World countries.

More than $200 trillion in total unfunded liabilities loom for the U.S. taxpayer as of 2015. These obligations can’t be paid in 2015 dollars. It’s mathematically impossible. But that doesn’t necessarily mean default is inevitable. Unlike Greece, the U.S. controls its own currency. If the dollars needed to pay the U.S. government’s bills don’t exist, the Treasury Department can always issue more debt and sell it to the Federal Reserve. The Fed simply creates an electronic entry showing the U.S. Treasury has new digital dollars that didn’t exist before. It’s the magic of fiat currency.

There is absolutely no upper limit to how much the Fed can digitally print. So while default is a very real risk for holders of Greek bonds, the real risk facing holders of U.S. bonds may be that of inflation.

In yet another case of a collapsing currency, today, Venezuelans faces rampant inflation, with the bolivar now practically worthless.

The bolivar has lost more than half its value this year, plunging to 400 per dollar on the free market as Venezuelans scramble to convert their savings into a more stable currency. Desperate, people are selling bolivars for a rate 60 times weaker than the strongest of country’s three official exchange rates.”

According to a Forbes report, “It’s been five months since Venezuela published inflation data. The most recent figure of 68.5% is the highest in the world.” And Barclays economist Alejandro Grisanti estimates the inflation rate now stands over 100%.

It’s gotten so bad that major companies are finding ways to avoid doing business in Venezuelan currency. Several major airlines have stopped booking tickets in bolivars, and Ford Motor Company reportedly just reached a deal with government officials to sell trucks for US dollars only.

People in the private sector are also seeking ways around the worthless Venezuelan currency.

Meanwhile, a new gold sector fund involving countries along the ancient Silk Road has been set up in northwest China’s Xi’an City.

The fund, led by Shanghai Gold Exchange (SGE), is expected to raise an estimated 100 billion yuan (16.1 billion U.S. Dollars) in three phases.

Among the 65 countries along the routes of the Silk Road Economic Belt and the 21st-Century Maritime Silk Road, there are numerous Asian countries identified as important reserve bases and consumers of gold.

About 60 countries have invested in the fund, which will in turn facilitate gold purchase for the central banks of member states to increase their holdings of the precious metal, according to the SGE.

“China does not have a big say in gold pricing because it accounts for a small share of international gold trade,” said Tang Xisheng of the Industrial Fund Management Co. “Therefore, the Chinese government seeks to increase the influence of RMB in gold pricing by opening the domestic gold market to international investors.”

According to Tang, the fund will invest in gold mining in countries along the Silk Road, which will increase exploration in countries such as Afghanistan and Kazakhstan.

Another central bank has announced plans to repatriate its gold. This time it is Austria. The nation’s central bank plans to repatriate some of its gold reserves from Britain after facing criticism for storing too much of the precious metal abroad, it said on Thursday.

The Austrian National Bank, which administers Austria’s 280 tons of gold reserves, said by 2020 50% of the reserves would be kept in Austria, 30% in London and 20% in Switzerland.

It currently keeps 80% of its gold reserves, which have been unchanged since 2007, in Britain, 17% in Austria and 3% in Switzerland.

Nobody in the mainstream media is talking about an inflation problem right now. But by the time inflation becomes enough of a problem to command the attention the main stream media, precious metals prices very likely be will be trading at significantly higher levels.

In other words, inflation insurance in the form of hard money will be more expensive. At current prices, gold is undervalued relative to the long-term financial disaster protection they provide.

For the moment, gold prices have been capped at around $1220 an ounce and continue to trade sideways.

Silver has been mined for thousands of years. But for most of the 20th century it was the poor man’s precious metal, its value eclipsed by the enduring lure of gold.

The first big revolution in silver came in 1492 with the discovery of the New World, which opened up mining of the metal on a scale not previously seen. In the centuries that followed Hernán Cortés and the conquistadors’ destruction of the Aztecs, Peru, Bolivia and Mexico accounted for three-quarters of all world production and trade in the metal.

Today, more than 877m ounces of silver are mined annually and the metal is increasingly being employed in new industrial processes. A major catalyst for demand over the next decade will be in the production of solar energy.

Silver is a key component in crystalline silicon photovoltaic (PV) cells. According to IHS, demand for solar power is set to increase by 30pc to 57 gigawatts of electricity in 2015. China alone is expected to install something in the region of 17 gigawatts of solar capacity by the end of the year, creating huge potential demand for silver.

The majority of PV cells use silver paste in their construction and that industry alone is expected to account for 70m ounces of supply through to the beginning of 2016. Silver demand for the PV industry grew by about 7pc last year and that rate of growth is expected to increase over the next decade. Despite the bright long-term demand picture for silver prices for the metal have slumped over the past three years from the $50 level to just under $17 per ounce. A major cause of this drastic drop has been China, which is the world’s major industrial user. Like all commodities which depend on Chinese factories, silver has suffered.

Silver mine production grew by just 5pc to 877.5m ounces last year, according to the ThomsonReuters survey. “This growth is attributable to stronger output from the primary silver and copper sectors, new projects that came online last year and significant production gains in Central and South America,” the report said.

Primary silver mine production grew by 8pc and accounted for 31pc of global silver mine supply. The report said that Mexico was the world’s leading silver producer, followed by Peru, China, Australia and Chile.

However, analysts fear that a lack of investment by silver miners could see production plateau over the next few years at a time when demand from the fast-growing solar power industry is expected to pick up rapidly. According to the report, total physical silver demand hit 1.07bn ounces last year, the fourth highest level recorded since 1990. This was a 4pc decline from the 2013.

“A main factor in the decrease in physical demand was a fall in coin and bar demand from 2013, which had been a record year,” said the report.

Of course, silver will always be second to gold in the eyes of precious metals investors. But like its cousin, copper, it is a commodity that will grow dramatically in importance as the world searches for new sources of renewable energy.

About the author

David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. Rand Refineries, the largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.